The Lapsed License and the Disgorgement Demand
Ridgeline Construction, Inc. holds a B (general building) license. Its qualifying individual, who is also the owner, let the license lapse from March 1 to April 20 after the renewal notice went to an old address, and on his accountant's advice he decided not to renew until he returned from an out-of-state job. Ridgeline kept working through the lapse, including on a $640,000 hillside remodel for a homeowner who has paid $410,000 and now refuses to pay the remaining $230,000. The homeowner cites Business and Professions Code section 7031 and demands a refund of everything already paid. Ridgeline also subcontracted framing to Sierra Frame, whose license had expired two months before Sierra started.
1. Analyze the homeowner's section 7031 defense, including the substantial compliance exception and who carries the burden.
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Section 7031(a) bars any action to collect compensation for work requiring a license unless the contractor proves it was licensed at all times during performance. The bar operates contract by contract: contracts performed entirely outside the March 1 to April 20 lapse are unaffected; anything performed in the window is exposed.
The narrow exception is substantial compliance. Ridgeline must prove (1) it was licensed at every point in performance except a lapse caused by inadvertence, (2) it acted promptly and in good faith to restore the license, and (3) it substantially complied overall. The burden is on Ridgeline, and the facts are poor:
- Deciding not to renew until returning from out-of-state work is a deliberate choice, not inadvertence. Reliance on an accountant does not convert a business decision into inadvertence.
- The renewal notice went to an old address, which points to an address-change failure within Ridgeline's control.
- Ridgeline continued contracting, working, and presumably pulling permits while unlicensed.
Prediction: the homeowner's defense probably succeeds on this contract, and the same defense is available on the other two contracts performed in the window. Plan for disgorgement exposure, not merely the loss of a $230,000 receivable.
2. Quantify Ridgeline's realistic exposure if the homeowner pursues section 7031(b), and identify what leverage, if any, Ridgeline has.
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Section 7031(b) allows the person who used an unlicensed contractor to recover all compensation paid, not damages measured by defective work. The homeowner paid $410,000 and can sue for it while keeping the completed remodel; courts have generally declined to net out the reasonable value of the work. Realistic exposure on this contract is therefore $410,000, and close to $640,000 if the homeowner also refuses the final $230,000 that Ridgeline can no longer collect.
Leverage analysis:
- Timing of the work. Check when each contract's performance actually began and ended. Any separate contract performed wholly after April 20 sits outside the bar and remains collectible.
- No waiver. The owner's knowledge of the lapse, or a contract clause purporting to waive section 7031, does not cure the problem.
- No unjust enrichment claim. The unlicensed contractor cannot recoup in quantum meruit what the statute bars it from collecting on the contract.
- Insurance and licensing consequences. Report the lapse to the carrier and expect a CSLB complaint; the same facts that defeat substantial compliance will be used against the license.
Practical recommendation: evaluate a negotiated discount on the final billing with a mutual release before the homeowner learns the full reach of section 7031(b), and do not file suit on the contract without pricing the counterclaim first.
3. What is Ridgeline's exposure on the Sierra Frame framing subcontract, and how should Ridgeline handle it now?
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Sierra Frame was unlicensed while framing, so Sierra is barred from collecting for that period, and any mechanics lien it records will fail. That does not make Ridgeline whole:
- Ridgeline remains responsible to the homeowner for the framing scope. A stop-work order, redo, or failed inspection costs schedule and reputation.
- Knowingly using an unlicensed subcontractor is itself a disciplinary matter for Ridgeline's license and invites a claim that Ridgeline participated in unlicensed contracting.
- The money not paid to Sierra is not a windfall; reserve it against the cost of completing or correcting the framing and any settlement with the homeowner.
Immediate steps: pull Sierra's license history, stop Sierra's work until a valid license is in place, pay only for work performed while the license was active (verify from the license dates), and document that Ridgeline did not knowingly use an unlicensed sub. Then fix the process: condition every subcontract and purchase order on a live license check at signing and again at mobilization, with a contractual right to withhold payment for any unlicensed period.